Black Market Tobacco Trade Could Be Stubbed Out

By Michael Carolan

AFP/Getty Images

It’s a familiar refrain from the tobacco industry: high excise hikes on tobacco products lead more consumers to buy their cigarettes on the black market. Governments should therefore be careful not to raise duty too sharply.

The clamour for higher tobacco duty from global governments in the last year should therefore have been a boon to spivs hawking cheap cigarettes the world over. Except of course on a global scale, this simply isn’t the case. In a year when governments across the world have been raising their excise rates on tobacco in an effort to trim their budget deficits, we should be seeing a huge rise in the illicit tobacco market. Right?

Well no. British American Tobacco’s Chief Executive Paul Adams said Wednesday there had been only a “slight rise” in the illicit market in the last year despite all the “significant” and “swingeing” excise increases mentioned in the company’s first-half results.

Some individual markets were undoubtedly affected. In Romania for instance, the percentage of cigarettes bought on the black market rose to 36% once government tax rises led to a doubling in the price of a pack. That percentage has now come down to around 24%, according to Adams. This reduction was not brought about by any reduction in the excise duty, however, but by a tightening of border controls.

Similar government action has led to a sharp reduction in the Canadian black market–where once again there were no price reductions.

So perhaps the link between high excise duty and the illicit tobacco trade is not quite as strong as we’re led to believe. Besides which, tobacco firms appear less concerned about fueling the illicit market when it comes to raising their own prices. The fact that BAT managed to raise is first half sales by 4%, despite flat volumes, suggests it had no qualms about raising the price of its Dunhills, Lucky Strikes or Pall Malls.

That’s not to suggest that illicit trade isn’t an issue of course. It accounts for about 12% of the world’s cigarette volumes. That means 12% of tobacco sales are effectively unregulated, with none of the strict controls on underage smoking the rest of the market faces. As the Canadian example and the recent experience in Romania have shown however, it is perhaps stricter border controls, and more stringent law enforcement rather than more modest duty increases that is best used to combat the problem.

Current state taxes cause states to lose money by overtaxing. My sister in law recently visited from New Jersey, and went home with 4 CASES of cigs. Since NJ has around $7/pack in taxes, she saved hundreds.of dollars, and MO got the tax revenue.

Higher taxes are a stupidity, not a way to raise revenue.

Editor Comment

4:54 pm July 28, 2010

Lauren Mills wrote:

Thank you for pointing out the error. Now amended. Would be good to hear your views on the subject of the article.

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